For retail, inventory management is crucial; having too much inventory ties up cash while having too little risks stockouts and lost sales. One KPI gaining in popularity is Days Sales of Inventory (DSI). It is now often quoted for gauging inventory performance. Banks often use it today. I think readers here will find it helpful.
From your accountant's figures which you are getting, it is easy to determine. So now is the time to look into it.
What is DSI?
DSI measures how many days a company's current inventory stock will last. It is calculated by dividing the average inventory by the cost of goods sold per day. The formula is:
DSI = (Average Inventory) / (Cost of Goods Sold) x (365 days)
when (Average Inventory) = ((Opening stock value in last Financial year)+(Closing stock value in last Financial year))/2
and the (Cost of Goods sold) you will get from your accountant.
Generally, the lower the DSI, the more efficiently you turn over your inventory and convert it to sales.
The kicker is that about 45. Most suppliers give 30 days, so 45 means you do not pay for your stock.
Why DSI Matters
DSI directly impacts cash flow and liquidity. The faster inventory turns into sales and cash, the sooner money can be reinvested or used to pay expenses. Slow inventory turnover ties up working capital.
DSI also reveals operational efficiency. Well-managed inventory aligns with demand forecasts and optimises stock levels. Comparing DSI over time or against industry benchmarks shows room for improvement.
DSI Across Industries
DSI varies widely between sectors based on product categories and sales cycles:
Grocery stores have a very low DSI, often less than ten days. Food products sell quickly with high turnover.
Electronics and appliances may have a DSI of around 45 days.
Factors Impacting DSI
Several factors influence DSI:
Sales Volume - Higher sales volume reduces DSI by turning over inventory faster. Declines in volume can lead to excess stock and higher DSI.
Inventory Levels - Keeping inventory aligned with demand lowers DSI. Overstocking increases inventory days on hand.
Pricing - Price reductions or discounts can temporarily boost sales volume and lower DSI.
Supplier Terms - Delaying payments to suppliers raises short-term working capital but may increase long-term costs.
DSI vs. Other Inventory Metrics
While DSI measures days of inventory on hand, other key metrics include:
Inventory Turnover Ratio (ITR) - Annual COGS divided by average inventory. Higher ratios indicate better efficiency.
Cash Conversion Cycle (CCC) - Days inventory outstanding + days sales outstanding - days payables outstanding. Lower CCC improves liquidity.
I will discuss these in a future post if there is enough interest.
Best Practices for Inventory Management
To optimise inventory performance and DSI, leading practices include:
As I have discussed many times, automating stock ordering using your focus AI system here.
Better stock ordering
Push high-volume stock items.
Monitoring DSI helps gauge inventory turnover, sales efficiency, and cash flow. It provides actionable insights into stock levels.